Don't Let the Law Hamper the Dialogue between Board and Shareholders

All around the world, stewardship is recognized as a function institutional investors should perform. In other words, they are supposed to play an active role in monitoring investee companies, swaying them out of short-termism, and to engage in corporate governance in the interest of people whose money they manage. Empirical research shows that board-shareholder dialogue, in the form of private meetings with board members, is the preferred way institutional investors fulfil this duty. "Nevertheless, this practice raises legal concerns both in the US and in the EU, because it may lead to the disclosure of price-sensitive information to selected shareholders", says Giovanni Strampelli, an Associate Professor of Commercial Law at Bocconi University and author of a paper on the subject, forthcoming in Virginia Law & Business Review.

"I observe that American and European legislations are converging", Prof. Strampelli says, "and that legal constraints should not be overstated, as neither jurisdiction categorically prohibits board-shareholder dialogue. Furthermore, the practice has proved to create value and it shouldn't be hampered".

Insider trading and disclosure rules on both sides of the Atlantic are less likely to bite than expected, because they only apply to price-sensitive inside information institutional investors are not interested in. "When they meet board members", Prof. Strampelli explains, "institutional investors want to communicate their views and not receive this kind of information, that would prevent them from trading the company's securities".

Both two-way director-shareholder dialogue not involving the disclosure of inside information and listen-only sessions with institutional investors result to be outside the scope of application of the U.S. Regulation Fair Disclosure and the EU Market Abuse Regulation.

The real issue, here, are the compliance costs needed to detect the transfer of price-sensitive information. Even if stewardship codes issued by corporate governance institutions are widespread, they are not binding and proposals are being discussed for introducing a legislative safe harbor by explicitly providing a list of corporate governance topics that can be freely discussed. "But a different solution seems to be preferable", Prof. Strampelli concludes. "The U.S. Securities and Exchange Commission and the European Securities and Markets Authority could provide more detailed guidance to boards and shareholders on admissible topics and proper procedures. It wouldn't constitute a perfect safe harbor, but it would effectively reduce compliance costs for both companies and investors".

Giovanni Strampelli, Knocking at the Boardroom Door: A Transatlantic Overview of Director-Institutional Investor Engagement in Law and Practice, forthcoming in Virginia Law & Business Review, available at SSRN: https://ssrn.com/abstract=3044278